*2103 By a written agreement executed December 31, 1923, between husband and wife, residents of California, it was provided that all their property and all the income arising therefrom or from compensation for personal services of either should become separate property and that each should be deemed to own an undivided one-half personal and separate interest therein. Held:
1. That said agreement did not, in the circumstances of the case (Docket No. 37355), affect either income or compensation for personal service in question for the year 1923, but both for said year are properly taxable to the petitioner.
2. That for 1924 and 1925 (Docket No. 45065) only one-half of the compensation earned by the wife became her separate property; the other one-half became the separate property of the husband, petitioner herein, and taxable to him. His entire compensation was taxable to him though one-half later became hers.
3. That for such years the income from stock which they owned and from property acquired in said years or from the sale of either is taxable one-half to each.
*587 In Docket No. 37355, the Commissioner determined a deficiency in income tax for 1923 in the amount of $1,557.81, and in Docket No. 45065, deficiencies in tax for 1924 and 1925 in the respective amounts of $7,895.63 and $1,625.18.
The issue in the former case is whether or not the Commissioner erred by including in the income of petitioner for the purpose of determining petitioner's net taxable income for 1923, salary of his wife, Edith M. Roth, and income from her alleged separate property for said year, contrary to the terms of a written agreement between petitioner and his wife, which agreement is set out in our findings of fact.
*588 In the latter case, similar errors are alleged to have been committed by the Commissioner in determining petitioner's net taxable income for 1924 and 1925.
Other issues are raised by the pleadings in each of said cases, but at the hearing were either abandoned or no evidence was adduced to sustain them.
The cases are consolidated for hearing.
FINDINGS OF FACT.
The petitioner and his wife, Edith M. Roth, both formerly of Los Angeles, are now residents of Pine Knot, *2105 Calif.
They were married in October, 1919. Prior to their marriage, Mrs. Roth was a bookkeeper for the Los Angeles Lime Company, a corporation of which petitioner was general manager, and both received compensation from said corporation for 1923 and 1924. Mrs. Roth also kept the books of one Dan Lohnes and received a salary therefor of $480 for 1923, which added to her salary from the Los Angeles Lime Company for the year 1923 made a total salary income of $6,563.08, which she reported in a separate income tax return and paid the tax thereon. Her total salary income for the year 1923 as indicated above was for said year added by the Commissioner to the net taxable income of the petitioner. Such action was assigned as error, but at the hearing, in view of decisions in Blair v. Roth, 22 Fed.(2d) 932 (certiorari denied, 277 U.S. 588">277 U.S. 588), and W. A. Roth,17 B.T.A. 1330">17 B.T.A. 1330, it was conceded that salary income received by the wife prior to the written agreement between them of December 31, 1923, hereinafter set out, is properly taxable to the petitioner.
The wife of the petitioner made return in 1923 of income other than salary as follows: *2106
| Gross income | ||
| Interest | $153.01 | |
| Rentals (loss) | (1,178.14) | |
| Profit on sale of lots | 5,378.11 | |
| Dividends | 367.55 | |
| Miscellaneous | 9.25 | |
| $4,729.78 | ||
| Deductions | ||
| Interest paid | 858.75 | |
| Taxes paid | 370.95 | |
| Loss on investment | 850.00 | |
| 2,079.70 | ||
| Net income | 2,650.08 |
The said reported net income of $2,650.08 was by the Commissioner added to the net taxable income of petitioner for said year. *589 Said net income of $2,650.08 was derived from property purchased in the years hereinafter indicated. Most of the property stood in the name of the petitioner's wife; some in their joint names. The piece sold in 1923 on which a profit of $10,756.22 was realized stood in their names and each reported one-half the profit. All said property was acquired after the marriage of petitioner and said Edith M. Roth and is as follows:
| 1922, stock | $9,000.00 |
| 1923, real estate, Alhambra | 35,000.00 |
| 1922, real estate, Alhambra | 3,000.00 |
| 1923, real estate, Hermosa Beach | 6,000.00 |
| 1923, real estate, Hermosa Beach | 1,750.00 |
| 1923, real estate, Hermosa Beach | 15,000.00 |
| 1923, real estate, Big Bear | 5,500.00 |
| 1923, real estate, Santa Monica | 1,048.50 |
| 1923, real estate, Los Angeles | 8,500.00 |
| 84,798.50 |
*2107 The petitioner gave his wife monies in 1922 and 1923 used in purchasing chasing the property described. How much was given and whether said property was entirely paid for by what was given is not shown.
For the years 1924 and 1925 (Docket No. 45065), petitioner included in his returns as income and paid tax thereon one-half of his salary, one-half of his wife's salary and one-half of all other income, and took one-half of allowable deductions.
For said years, petitioner's wife returned as income and paid tax thereon one-half of her salary, one-half of her husband's salary and one-half of all other income and took as a deduction one-half of all allowable expenses.
The Commissioner, for the purpose of determining the net taxable income of the petitioner for 1924 and 1925, added to the same as returned by him for said years the respective amounts of $28,443.92 and $16,428.45, being the entire net income of his wife for said years.
The agreement between the petitioner and his wife, and on which he relies in support of his contention that the action of the Commissioner in his determination of deficiencies for the years 1923, 1924, and 1925 is erroneous, reads as follows:
*2108 THIS AGREEMENT, entered into the 31st day of December, 1923, between the undersigned, WALTER A. ROTH and EDITH M. ROTH, husband and wife, WITNESSETH:
For five (5) years last past, the parties hereto have been husband and wife and each of the parties has been employed and engaged in business. Each of the parties has been receiving compensation for personal services in the business and each of the parties has had invested in the business in which he or she was employed and in outside investments various sums of money *590 constituting the personal property of said parties; that it has been impossible to ascertain what proportion or amount of the salaries paid to each has been the result of the personal services and efforts of each and what proportion of said salaries has been due to an indirect compensation for investment in business; that it has been and is impossible to ascertain what proportion of the investment holdings of each is due to the individual personal services and efforts of each and what proportion is due to the increase and rents, issues and profits of the personal property of each. As far as an accounting is concerned, the parties have commingled their various*2109 funds and have held titles to real estate in one or anothers name irrespective of any claim to or recognition of full legal interest in the title so held. The parties realize that their present method of holding said properties is confusing, and, in the event of the death of either of the parties, may result ultimately in controversy and other difficulties. Therefore, the parties do agree as follows:
They agree that this memorandum shall constitute an evidence of the understanding between them to change the character and status of all of their property holdings and property rights as herein set forth. They agree that in the event that any of their property they now own is community property, that that property shall be transferred and changed from community property into separate property as herein set forth. They agree that all of their property of whatever kind or character and all of their income from whatever source derived (whether derived as the rents, issues and profits of property now existing or whether derived as compensation in payment for personal services) shall be and become separate property and not community property and that each of the parties hereto shall be*2110 deemed to own an undivided one-half personal and separate interest in all the properties now owned by the parties hereto in all of the rents, issues and profits of said properties and in and to the moneys received by way of compensation for the services of each.
It is understood, however, that for the purpose of carrying this agreement into immediate effect, it shall not be necessary to change the record titles of any properties whether the same consist of real estate, stocks, bonds, notes or anything else.
Signed, executed and acknowledged, this 31st day of December, 1923.
(Signed) WALTER A. ROTH.
EDITH M. ROTH.
The execution of the foregoing agreement was on the day it bears date duly acknowledged before a notary public.
The written agreement entered into the 31st day of December, 1923, between the petitioner and his wife and set out in our findings of fact, is in its terms the same as the oral agreement relied on in Docket No. 6012 and is the same set forth in our findings of fact in Docket No. 26563.
The bank account from which interest of $153.01 was returned by each stood in their joint names and either was at liberty to draw on same at will. The dividends*2111 reported, one-half by each, were from stock standing in the name of Mrs. Roth. The Alhambra real estate stood in their joint names; the other in Mrs. Roth's name.
*591 The sale of the Alhambra property produced the profit, one-half of which ($5,378.11) was returned by each for the year 1923. So far as the record shows, all the property from which income reported arose was acquired after the marriage of the petitioner and his wife.
The petitioner in the instant cases is the same as in Docket Nos. 6012 and 26563 heretofore decided by this Board in 4 B.T.A. 834">4 B.T.A. 834 (reversed in Blair v. Roth, supra ), and 17 B.T.A. 1330">17 B.T.A. 1330, supra, respectively. The stock and real estate described in the petition in Docket No. 37355 is the same property described in Docket No. 26563, supra. Since the execution of the written agreement of December 31, 1923, the petitioner and his wife have made return of income from property and salaries as if owned one-half by each, but no change of titles of record has been made.
OPINION.
SEAWELL: The contract of December 31, 1923, by reason of which petitioner contends that the income earned by his*2112 wife and income from the property mentioned in the findings of fact should not be taxed to him as community property, is the same contract involved in the case of W. A. Roth,17 B.T.A. 1330">17 B.T.A. 1330. In the decision of that case it was said: "Clearly this writing does not apply to the year 1922," (the year involved in that case) "as it was not executed until one year thereafter, and whatever its terms may be their effect was limited to the time of execution and the future. It has no retroactive effect."
In the brief in behalf of the petitioner it is insisted that petitioner's wife received subsequent to the execution of said written agreement certain income, to wit: Salary from Los Angeles Lime Company, $200; from Dan Lohnes, $40; and a bonus from Los Angeles Lime Company, the amount of which, $3,683.08, was not determined nor received until 1924, and all of which she reported in 1923 as "constructively received" as her separate income, properly taxable to her and not to the petitioner. There is no sufficient evidence to sustain such contention nor to overcome the presumption of the correctness of the respondent's determination for 1923 in adding the amount of the salary*2113 of petitioner's wife to his taxable income. The income for the year 1923 was unaffected by the writing mentioned, which had reference alone to future transactions. This determination of the Commissioner for the year 1923, Docket No. 37355, is therefore approved.
For the years 1924 and 1925, involved in Docket No. 45065, said writing of December 31, 1923, executed by the petitioner and his *592 wife was in force and effect. What that effect was and is, we will now inquire. Under the California Civil Code, sections 162, 163 and 164, all property acquired after marriage by either spouse constitutes community property, except that acquired by gift, bequest, devise or descent. The property held by the petitioner and his wife was not acquired before marriage and is community property. All community income in California is returnable by and taxable to the husband. Blair v. Roth, 22 Fed.(2d) 932; United States v. Robbins,269 U.S. 315">269 U.S. 315; H. A. Belcher,11 B.T.A. 1294">11 B.T.A. 1294; affd., *2114 Belcher v. Lucas, 39 Fed.(2d) 75. But under sections 157 and 158 of the California Civil Code it is further provided that neither husband nor wife has any interest in the property of the other and either may enter into any engagement or transaction with the other, or with any other person, respecting property, which either might if unmarried. There is, therefore, no question as to the right and power of the petitioner and his wife to contract with reference to their community property or other property and to agree that the community property may be held as individual or separate property, and that the personal earnings of the wife, present or future, may be her separate property and not community property. Kaltschmidt v. Weber,145 Cal. 596">145 Cal. 596; 79 Pac. 272.
Under the contract duly acknowledged by each it is agreed, inter alia, "that in the event that any of their property they now own is community property, that that property shall be transferred and changed from community property into separate property as herein set forth. They agree that all of their property of whatever kind or charcter and all of their income from whatever*2115 source derived (whether derived as the rents, issues and profits of property now existing or whether derived as compensation in payment for personal services) shall be and become separate property and not community property, and that each of the parties hereto shall be deemed to own an undivided one-half personal and separate interest in all the properties now owned by the parties hereto in all of the rents, issues and profits of said properties * * *."
This contract is practically the same as that between Guy C. Earl and his wife which case was held valid by the Circuit Court of Appeals for the Ninth Circuit, Earl v. Commissioner, 30 Fed.(2d) 898, and this part of the decision was approved by the Supreme Court in the following language by Mr. Justice Holmes: "The validity of the contract is not questioned, and we assume it to be unquestionable under the law of the State of California, in which the parties lived." Nevertheless the Supreme Court in this case *593 held that the income of Guy C. Earl, from salary and fees from his law practice, was all his own for taxation purposes, and his wife was not permitted to return one-half thereof as her income for*2116 taxation to the relief of her husband. The Court said: "* * * however the matter might stand between husband and wife he was the only party to the contracts by which the salary and fees were earned, and it is somewhat hard to say that the last step in the performance of those contracts could be taken by anyone but himself alone." Lucas v. Earl,281 U.S. 111">281 U.S. 111.
It would seem, therefore, that Mrs. Roth's salary should be taxable to her, but the learned Judge previously quoted said in the Earl case that these tax cases are not to be decided by attenuated subtleties. Unless the contract between her and her husband made her salary something other than community property it is all (it matters not on what "tree the fruit may have grown") taxable to the husband. It seems the husband may not so contract with his wife as to make his personal salary income to his wife. It is first income to him and then it may be his wife's property under the contract, but her title does not attach until after it has become income to him. With reference to the wife's income, however, a different situation is presented. Her efforts produce salary which would be taxable to her as*2117 her own income but for the provisions of the law of California which gives it, i.e., the right to it, to her husband even before she earns it. There is nothing in the law to prevent the husband from releasing, forgiving and annulling this right to his wife and by contract he may surrender and annul the inchoate right given him under the law (Lucas v. Earl, supra), and to the extent to which it is released it never becomes income to the husband. In this case we hold that the contract did so release, forgive, annul and remit one-half of her income to Mrs. Roth and it was not taxable to the petitioner, but alone to her. A.B.C. Dohrmann,19 B.T.A. 466">19 B.T.A. 466. As only one-half was so released, it follows that the other half is taxable to the petitioner.
This result seems also consonant with the recent opinion of the Supreme Court in Poe v. Seaborn,282 U.S. 101">282 U.S. 101, in which it was held that in a State whose community property laws give the wife a present vested interest as contradistinguished to the mere expectancy in such property said to be given under the California laws, community property should be returned one-half by each*2118 and so taxed.
With reference to income from rentals and sales of real estate, we are confronted with the suggestion that the contract is not sufficient *594 in from to convey land, and mere income as a bare right is not a subject for conveyance under the taxing law. We hold, however, that the contract between husband and wife, even if not sufficient as a conveyance, is good as a contract to convey and sufficient to support specific performance; and as between the parties amounts to an equitable conveyance. "A deed 'of all my estate' is sufficient. So a deed 'of all my lands wherever situated' is good to pass title. Johnson v. DeLancy,4 Cow. 427">4 Cow. 427; Pond v. Berg,10 Paige Ch. 140">10 Paige 140; 1 Atk. on Conv., 2. A mortgage 'of all my property' like the one we are considering, is sufficient to transfer title." Wilson v. Boyce,92 U.S. 320">92 U.S. 320, 325. See also Alabama v. Montague,117 U.S. 602">117 U.S. 602, 610; First Trust & Savings Bank v. Bitter Root Valley Irrigation Co.,251 Fed. 320, 322. It would seem, therefore, to follow that income from dividends and rentals and sales of real estate should be*2119 divided and held taxable one-half to the husband and one-half to the wife, and we so hold. In reference to any salary and earnings of the petitioner, the contract is ineffectual to convey them before received by the petitioner and the whole of such income is taxable to him, and we so hold.
The decision of the Supreme Court in United States v. Malcolm,282 U.S. 792">282 U.S. 792, deals with a fundamental change in the community property law of the State of California, enacted after the taxable years here involved.
Reviewed by the Board.
In Docket No. 37355 (1923), judgment will be entered for the respondent. In Docket No. 45065 (1924 and 1925), judgment will be entered under Rule 50.
MURDOCK, dissenting: I dissent from that portion of the opinion which holds that one-half of the compensation paid for the services performed by the wife may on account of the contract be made taxable to the wife. This compensation must first have been community income and the husband must return California community income.
ARUNDELL agrees with this dissent.
MORRIS and MCMAHON dissent from the same portion of the prevailing opinion on the authority of*2120 Lucas v. Earl,281 U.S. 111">281 U.S. 111.